dbs3024 biz trx week 3 business documentation

Business DocumentationBusiness DocumentationBusiness DocumentationBusiness Documentation

DBS3024 BUSINESS TRANSACTIONDBS3024 BUSINESS TRANSACTION

byStephen Ong

Visiting Fellow, Birmingham City University Business School

Visiting Professor, Shenzhen University

Today’s Overview Today’s Overview

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Learning objectivesLearning objectives Justify the need for books of original Justify the need for books of original

entryentry Explain what each book of original entry Explain what each book of original entry

is used foris used for Describe the process of recording Describe the process of recording

transactions in a book of original entry transactions in a book of original entry and then recording a summary of the and then recording a summary of the transactions involving similar items in a transactions involving similar items in a ledgerledger

Distinguish between personal and Distinguish between personal and impersonal accountsimpersonal accounts

List the ledgers most commonly used and List the ledgers most commonly used and distinguish between those that are used distinguish between those that are used for personal accounts and those that are for personal accounts and those that are used for impersonal accountsused for impersonal accounts

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11REVISION : The double REVISION : The double

entry system for expenses entry system for expenses and revenuesand revenues

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The nature of profit or lossThe nature of profit or loss

Profit means the amount by which Profit means the amount by which revenue is greater than expenses for a revenue is greater than expenses for a set of transactions, where:set of transactions, where:

Revenue means the sales value of Revenue means the sales value of goods and services that have been goods and services that have been supplied to customers.supplied to customers.

Expenses means the cost value of all Expenses means the cost value of all the assets that have been used up to the assets that have been used up to obtain these revenues.obtain these revenues.

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Calculating profitCalculating profit

If we supplied goods and services valued for sale If we supplied goods and services valued for sale at RM100,000 to customers, and the expenses at RM100,000 to customers, and the expenses incurred by us in order to supply those goods and incurred by us in order to supply those goods and services amounted to RM70,000, the result would services amounted to RM70,000, the result would be a profit of RM30,000:be a profit of RM30,000:

RevenueRevenue RM100,000 RM100,000

LessLess expenses expenses (RM70,000)(RM70,000)

ProfitProfit RM30,000RM30,000

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The effect of profit and loss on The effect of profit and loss on capitalcapital

The accounting equation we have used The accounting equation we have used is:is:

Capital = Assets Capital = Assets −− Liabilities Liabilities

When profit has been earned, this When profit has been earned, this increases capital:increases capital:

Old capital + Profit = New capitalOld capital + Profit = New capital Or when a loss has been earned, the Or when a loss has been earned, the

capital figure decreases:capital figure decreases:

Old capital Old capital −− Loss = New capital Loss = New capital

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Recording expensesRecording expenses

In order to calculate profit, expenses In order to calculate profit, expenses must be entered into appropriate must be entered into appropriate accounts. A accounts. A separate account separate account is is opened for each type of expense:opened for each type of expense:

Bank interest accountBank interest account Subscriptions accountSubscriptions account Rent accountRent account

Overdraft interest Overdraft interest accountaccount

Motor expenses Motor expenses accountaccount

Postages Postages accountaccount

Audit fees accountAudit fees account Telephone accountTelephone account Stationery Stationery accountaccount

Insurance accountInsurance account General expenses General expenses accountaccount

Wages accountWages account

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Debit or creditDebit or credit

Assets and expenses involve Assets and expenses involve expenditure by the business and are expenditure by the business and are shown as shown as debit entries debit entries because they because they must ultimately be paid for.must ultimately be paid for.

Revenue is the opposite of expenses Revenue is the opposite of expenses and therefore revenue entries appear on and therefore revenue entries appear on the the credit side credit side of the revenue accounts.of the revenue accounts.

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Debit or credit (Continued)Debit or credit (Continued)

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Double entries for expenses and Double entries for expenses and revenuesrevenues

Rent of RM200 is paid in cash:Rent of RM200 is paid in cash:

Debit the rent account with RM200Debit the rent account with RM200

Credit the cash account with RM200Credit the cash account with RM200

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Double entries for expenses and Double entries for expenses and revenues (Continued)revenues (Continued)

Motor expenses of RM355 are paid by Motor expenses of RM355 are paid by cheque:cheque:

Debit the motor expenses account with Debit the motor expenses account with RM355RM355

Credit the bank account with RM355Credit the bank account with RM355

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Double entries for expenses and Double entries for expenses and revenues (Continued)revenues (Continued)

RM60 cash is received for commission RM60 cash is received for commission

earned by the business:earned by the business:

Debit the cash account with RM60Debit the cash account with RM60

Credit the commissions received account Credit the commissions received account with RM60with RM60

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ActivityActivity

June 1 – Paid for postage stamps by cash June 1 – Paid for postage stamps by cash RM50RM50

June 2 – Paid for electricity by cheque RM229June 2 – Paid for electricity by cheque RM229

June 3 – Received rent in cash RM138June 3 – Received rent in cash RM138

June 4 – Paid insurance by cheque RM142June 4 – Paid insurance by cheque RM142

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Activity (Continued)Activity (Continued)

Exhibit 6.1

More ExamplesMore Examples

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DrawingsDrawings

Money that the owner takes from the Money that the owner takes from the business for private use is called business for private use is called drawings.drawings.

Drawings reduces capital – they are never Drawings reduces capital – they are never an expense of the business.an expense of the business.

An increase in drawings is a debit entry in An increase in drawings is a debit entry in the drawings account.the drawings account.

The credit entry is against cash or bank if The credit entry is against cash or bank if money was taken from the business, or money was taken from the business, or purchases if stock was taken.purchases if stock was taken.

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Recording drawingsRecording drawings

On 25 August, the owner takes RM50 cash On 25 August, the owner takes RM50 cash out of the business for his own use:out of the business for his own use:

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Recording drawings Recording drawings (Continued)(Continued)

On 28 August, the owner takes RM400 of On 28 August, the owner takes RM400 of goods out of the business for his own use: goods out of the business for his own use:

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Complete the following table :Complete the following table : Account to Account to be be

DebitedDebited

Account to Account to be be

CreditedCredited

((a) Sold surplus stationery, receiving a) Sold surplus stationery, receiving proceeds in cash proceeds in cash

(b) Paid salaries by cheque (b) Paid salaries by cheque (c) Rent received for premises sublet, (c) Rent received for premises sublet, by cheque by cheque

(d) Goods returned to us by Royal (d) Goods returned to us by Royal Products Products

(e) Commission received by us (e) Commission received by us previously in error, now refunded by previously in error, now refunded by cheque cheque

(j) Bought machinery by cheque (j) Bought machinery by cheque (g) Paid lighting expenses in cash (g) Paid lighting expenses in cash (h) Insurance rebate received by (h) Insurance rebate received by cheque cheque

(i) Buildings bought by cheque (i) Buildings bought by cheque (j) Building repairs paid in cash. (j) Building repairs paid in cash.

  CASHCASH   STATIONERYSTATIONERY

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22Business Documentation

The Trading ActivityThe Trading Activity

QuotationQuotation

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Purchase OrderPurchase Order

Advice NoteAdvice Note

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Delivery NoteDelivery Note

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InvoiceInvoice

Returns NoteReturns Note

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Credit NoteCredit Note

Statement of AccountStatement of Account

Remittance AdviceRemittance Advice

Goods Received NoteGoods Received Note

Abbreviations & Terms of TradeAbbreviations & Terms of Trade Carriage paid Carriage paid : Cost of transport included in : Cost of transport included in

the cost of goodsthe cost of goods CODCOD : Cash on delivery, means goods must : Cash on delivery, means goods must

be paid on deliverybe paid on delivery E&OEE&OE : Errors & Ommissions Excepted, is : Errors & Ommissions Excepted, is

a warning of possible errors or omissions a warning of possible errors or omissions on the invoiceon the invoice

Ex works Ex works : Price of goods does not include : Price of goods does not include delivery costsdelivery costs

Net monthly Net monthly : Full amount of the invoice is : Full amount of the invoice is due for payment within 1 month of invoice due for payment within 1 month of invoice date.date.

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The Pet Shop LimitedThe Pet Shop LimitedVideo : The Parrot Sketch (Monty Python)Video : The Parrot Sketch (Monty Python)

http://www.youtube.com/watch?v=4vuW6tQ0218

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33Books of original entry and

ledgers

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Types of books of original entryTypes of books of original entryThere are six books of original entry:There are six books of original entry:

1.1. Sales day book Sales day book – for credit sales– for credit sales2.2. Purchases day book Purchases day book – for credit purchases– for credit purchases3.3. Returns inwards day book Returns inwards day book – for returns – for returns

inwardsinwards4.4. Returns outwards day book Returns outwards day book – for returns – for returns

outwardsoutwards5.5. Cash book Cash book – for receipts and payments of – for receipts and payments of

cash and chequescash and cheques6.6. JournalJournal – for all other items – for all other items

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Types of ledgerTypes of ledger

There are three types of ledgers:There are three types of ledgers: Sales ledger Sales ledger – for customers’ personal – for customers’ personal

accounts.accounts. Purchases ledger Purchases ledger – for suppliers’ – for suppliers’

personal accounts.personal accounts. General ledger General ledger – for the remaining – for the remaining

double entry accounts such as double entry accounts such as expenses, non-current assets and expenses, non-current assets and capital.capital.

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ProcedureProcedure Entries are made in the books of Entries are made in the books of

original entry.original entry. These entries are then summarised and These entries are then summarised and

the summary information is entered the summary information is entered

into the various ledgers using into the various ledgers using double double entry entry bookkeeping.bookkeeping.

Often, each ledger is operated by a Often, each ledger is operated by a separate bookkeeper, to make the work separate bookkeeper, to make the work easier and to allow checking to take easier and to allow checking to take place.place.

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Types of accountsTypes of accountsAccounts can be classified as personal Accounts can be classified as personal or impersonal accounts:or impersonal accounts:

Personal accounts Personal accounts belong to debtors belong to debtors and creditors.and creditors.

Impersonal accounts Impersonal accounts are subdivided are subdivided between – between – Real accounts Real accounts in which possessions in which possessions

such as assets are recorded.such as assets are recorded. Nominal accounts Nominal accounts in which in which

expenses, income and capital are expenses, income and capital are recorded.recorded.

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The Books Don’t BalanceThe Books Don’t Balance

Video : The Office - the AccountantsVideo : The Office - the Accountants

http://www.youtube.com/watch?v=cexULeQiCjA

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Learning outcomesLearning outcomes1.1. That transactions are classified and details That transactions are classified and details

about them are entered in the appropriate about them are entered in the appropriate book of original entrybook of original entry

2.2. That the books of original entry are used as That the books of original entry are used as a basis for posting the transactions in a basis for posting the transactions in summary form to the double entry accounts summary form to the double entry accounts in the various ledgersin the various ledgers

3.3. That there is a set of books of original entry, That there is a set of books of original entry, each of which serves a specific purposeeach of which serves a specific purpose

4.4. That there is a set of ledgers, each of which That there is a set of ledgers, each of which serves a specific purposeserves a specific purpose

Resources : Core ReadingResources : Core Reading

Wood, Frank and Robinson, Sheila Wood, Frank and Robinson, Sheila (2009) (2009) Bookkeeping and Accounts Bookkeeping and Accounts ,7,7thth Edition, Pearson/ FT Prentice HallEdition, Pearson/ FT Prentice Hall

Wood, Frank and Sangster, Alan (2012) Business Accounting ,12th Edition, Pearson/ FT Prentice Hall

Fortes, Hilary (2011) Accounting Simplified , Pearson/ FT Prentice Hall

QUESTIONS?QUESTIONS?